Kerr-McGee Corp. said Tuesday that it has authorized management to proceed with a proposal to either spin off or sell its chemical business, and the board authorized a share repurchase initially set at $1 billion, which may be expanded after the chemical unit is sold or spun off. The company also blasted a proposal by financier and shareholder Carl Icahn, who called on the company to set up a volumetric production payment (VPP) transaction for 250 million boe.

Icahn and his financial group said they plan to purchase up to $1 billion worth of Kerr-McGee stock, and so far, have purchased about 5% of the company’s stock, worth about $509 million (see Daily GPI, March 4). Icahn, who had sent a letter to Kerr-McGee suggesting that it sell its chemical business and set up a VPP to make money, said he intends to nominate two candidates to the board of directors at the company’s annual meeting in May.

“We do not believe that the value of our chemical business is adequately reflected in our market valuation,” said CEO Luke R. Corbett. “For some time, the board has been considering the separation of chemical, and current market conditions for this industry now make it an ideal time to unlock this value for our stockholders.”

After the chemical business is separated, Corbett said Kerr-McGee would “focus on our core competencies in exploration, exploitation, development and production.”

Kerr-McGee’s chemical unit has gross production capacity of 624,000 tonnes/year of titanium dioxide, an inorganic white pigment used in paint, coatings, plastics, paper and many other products. Approximately 83% of this capacity uses the company’s proprietary chloride-process technology for producing titanium dioxide pigment.

The initial $1 billion share repurchase program primarily will be financed through the use of free cash flow generated from operations after planned capital expenditures, which is projected to be approximately $850 million in 2005. To ensure a portion of the projected cash flow, the company has hedged approximately 45% of its expected oil production and approximately 50% of its expected U.S. natural gas production for 2005 and expects to add to these positions from time to time, it said.

The Oklahoma City-based independent also expects to use a portion of its existing bank credit facility and may issue new securities, which may be in the form of debt or perpetual preferred stock, to fund the remaining repurchase program. The company said it is maintaining its plan to retire an additional $450 million of debt maturities due in 2005. The board and management reiterated their commitment to maintain an investment-grade credit rating.

“With respect to a proposal put forward by the Icahn group suggesting a volumetric production payment (VPP) transaction for 250 million boe, the board, following careful consideration of recommendations from its financial advisers, unanimously rejected the proposal as irresponsible and not in the best interests of all of its stockholders, creditors and the company,” the company said in a statement.

“Mr. Icahn’s proposal of a VPP of this magnitude would extract the revenue from approximately 32% of our proved developed producing reserves, while leaving the company with 100% of the costs,” said Corbett.”This would not leave the company with sufficient capital to develop the more than 425 million boe of reserves currently booked as proved but undeveloped.

“As a result, we believe the value of our remaining proved reserves would be greatly reduced. Additionally, this proposal would not allow for the timely exploitation of our large inventory of identified probable and possible resources and exploration of our high-potential prospect inventory. Finally, since none of the proceeds from Mr. Icahn’s proposal would be applied to debt reduction, it would have very serious negative implications to our capital structure and likely cause our credit rating to drop to junk status.

“We have seen VPPs employed productively on a much more prudent scale, but Mr. Icahn’s proposal is tantamount to mortgaging the company’s future simply to provide Mr. Icahn and his partners with some quick cash. We believe Mr. Icahn’s analysis is flawed, and we will make our case directly with our stockholders.”

Lehman Brothers Inc. and JP Morgan are acting as financial advisers to the company.

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